Moody’s State Bond Ratings

Tax Burden and

Per Capita Spending

Albany Research In Public Administration (ARPA)

Report Number 2021-14
August 11, 2021
Prepared by Kevin M. Bronner, Ph.D.
Albany, New York

www.albanyrpa.com
Albany Research In Public Administration Page 1
 Moody’s State Bond Ratings Tax Burden and

Per Capita Spending

Abstract

This paper examines the bond ratings for the state governments and examines
whether the highest rated bonds have average metrics that most likely influence their bond
rating. A group of 15 states with Aaa rated bonds are compared to the remaining 34 states that
have lower bond ratings. In most cases the Aaa rated bonds have more flexibility in increasing
taxes and spending than the group of states with the lower bond ratings. In terms of financial
flexibility the states with Aaa bonds have more financial flexibility than the states with lower
bond ratings.

Introduction

Moody’s Investors Service (Moody’s) recently published a review of their bond ratings

for the states from 1970 to 2021.1 This paper examines whether there is a relationship between

the bond ratings for the states and their tax burden and per capita spending levels. The tax data is

taken from a Tax Foundation analysis of state income tax rates that was published in February

2021,2 and from a Tax Foundation study of tax burdens from 2021.3 Appendix 1 shows the

bond ratings and the tax information for the states. The state of Wyoming is not included in the

analysis because it does not have a Moody’s bond rating.

1
Moody’s Investors Service, Rating Changes for the 50 states from 1970, July 21, 2021.
2
Tax Foundation, State Individual Income Tax Rates and Brackets for 2021, February 2021.
3
Tax Foundation, State and Local Tax Burden, Calendar Year 2019. March 2021.

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 The data for the 49 states shows that there are 15 bonds with an Aaa bond rating while

the remaining 34 states have various bond ratings as shown below:

Bond Rating Number of States

Aaa 15

Aa1 17

Aa2 10

Aa3 5

A3 1

Baa2 1

Moody’s has a bond rating methodology for the states which includes a scorecard

analysis of the various states.4 The scorecard includes many variables such as those related to

the economy, finances, governance structure, and levels of debt and pensions. Some of the

specific items measure per capita income and nominal state gross domestic product, the level of

fixed costs and liquidity and fund balance metrics. Other variables include the amount of debt

and pensions. In the final analysis Moody’s often looks at the financial status of the state

government.

The tax burden for a specific state shows the amount of taxes imposed by the

government. In general, if the tax burden is low this indicates that the state has a good financial

position if it had to raise taxes. The tax burdens for the states are shown in Appendix 1 and are

summarized below.

4
Moody’s Investors Service: Rating Methodology US States and Territories, April 12, 2018.
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 Bonds Average Tax Burden

All 49 State Bonds 10.03%

Aaa Rated Bonds (n=15) 9.37%

Remaining Bonds (n=34) 10.32%

The average tax burden for the 49 states is 10.03% while the states with Aaa bond ratings

have a tax burden of 9.37 percent. The 34 states that do not have an Aaa bond rating have a tax

burden of 10.32 percent. This means that on average the states with non Aaa rated bonds have a

tax burden that is about 10 percent higher than the states with Aaa bond ratings. A state with a

lower tax burden can be viewed as having more financial flexibility than a state with a higher tax

burden.

The income tax rates developed by the states are part of the tax burden. The highest

income tax rates for the 49 states are included in this analysis and are shown as follows:

Bonds Average Highest Income

Tax Rate
All 49 State Bonds 5.54%

Aaa Rated Bonds (n=15) 3.88%

Remaining Bonds (n=34) 6.14%

The group of 49 states has a tax rate of 5.54 percent while the group of 15 states that have

an Aaa bond rating have a value of 3.88%. The issue is complicated because six states in the

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Aaa rated group have a zero tax rate including Florida, Nevada, South Dakota, Tennessee, Texas

and Washington. The 3.88 percent income tax rate is somewhat distorted since may states do not

use income taxes.

The level of per capita spending is another variable that could influence the financial

position of the states. Appendix 1 includes the per capita spending for the states. The data can

be summarized as follows:

Bonds Average Per Capita

Spending
All 49 State Bonds $9,361

Aaa Rated Bonds (n=15) $8,503

Remaining Bonds (n=34) $9,742

The 49 states have an average amount of per capita spending of $9,361. States with Aaa

bond ratings have average per capita spending of $8,503. The remaining states have average per

capita spending of $9,464. The per capita spending of the 34 states with non Aaa rated bonds is

about 15 percent higher than the group of Aaa rated states.

Conclusion

The analysis indicates that on average the states with Aaa bond ratings have a lower tax

burden, income tax rate, and spending levels than the remaining states. One complicating factor

in this analysis is that several of the states with an Aaa bond Rating have a zero income tax. The

income tax burden would, therefore, be a good area to conduct future research. The tax burden

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and per capita spending variables present items which are likely related to the financial status of

each state. States with low tax burdens will have more financial flexibility than states with

higher tax burdens. Also, a state with lower per capita spending than other states will have more

flexibility to increase spending if needed.

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 Appendix 1, Page 1.
State Bond Ratings and Tax Rates and Spending
Bond Tax Tax Per Capita
State Rating Rate % Burden % Spending

Alabama Aa1 5.00 9.0 $8,516

Alaska Aa3 0.00 5.8 17,198

Arizona Aa1 8.00 8.7 6,838

Arkansas Aa1 5.90 10.4 8,226

California Aa2 13.3 11.5 11,560

Colorado Aa1 4.55 9.4 8,959

Connecticut Aa3 6.99 12.8 9,489

Delaware Aaa 6.60 10.3 11,167

Florida Aaa 0.00 8.8 7,346

Georgia Aaa 5.75 8.9 6,872

Hawaii Aa2 11.0 12.7 9,834

Idaho Aa1 6.925 9.6 6,766

Illinois Baa2 4.95 11.1 9,168

Indiana Aaa 3.23 8.9 7,961

Iowa Aaa 8.53 10.8 9,864

Kansas Aa2 5.70 10.1 9,252

Kentucky Aa3 5.00 9.9 8,847

Louisiana Aa3 6.00 9.2 9,145

Maine Aa2 7.15 11.0 8,703

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 Appendix 1, Page 2.
State Bond Ratings and Tax Rates and Spending
State Bond Tax Tax Burden Per Capita
Rating Rate % % Spending
Maryland Aaa 5.75 11.8 10,046

Massachusetts Aa1 5.00 10.5 11,303

Michigan Aa1 4.25 10.0 8,528

Minnesota Aa1 9.85 12.1 10,600

Mississippi Aa2 5.00 9.5 8,748

Missouri Aaa 5.40 9.2 7,721

Montana Aa1 6.90 10.1 8,967

Nebraska Aa1 6.84 10.3 9,177

Nevada Aa1 0.00 9.7 7,384

New Hampshire Aa1 5.00 9.7 8,222

New Jersey A3 10.75 11.7 10,482

New Mexico Aa2 5.90 8.8 10,207

New York Aa2 8.82 14.1 14,381

North Carolina Aaa 5.25 9.5 7,848

North Dakota Aa1 2.90 8.9 12,842

Ohio Aa1 4.797 10.3 9,201

Oklahoma Aa2 5.00 8.2 7,458

Oregon Aa1 9.90 11.1 10,807

Pennsylvania Aa3 3.07 10.4 10,102

Rhode Island Aa2 5.99 11.4 10,302

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 Appendix 1, Page 3.
State Bond Ratings and Tax Rates and Spending
State Bond Tax Tax Burden Per Capita
Rating Rate % % Spending
South Carolina Aaa 7.00 8.9 8,614

South Dakota Aaa 0.00 9.1 8,091

Tennessee Aaa 0.00 7.0 6,918

Texas Aaa 0.00 8.0 7,983

Utah Aaa 4.95 9.6 8,379

Vermont Aa1 8.75 12.3 11,774

Virginia Aaa 5.75 10.0 8,705

Washington Aaa 0.00 9.8 10,037

West Virginia Aa2 6.50 9.9 9,012

Wisconsin Aa1 7.65 10.7 9,288

Wyoming n/r 0.00 7.0 15,354

Sources:

Moody’s Investors Service, Rating Changes for the 50 states from 1970, July 21, 2021.

Tax Foundation, State Individual Income Tax Rates and Brackets for 2021, February 2021.

Tax Foundation State and Local Tax Burden, Calendar Year 2019. March 2021.

Note: n/r means a non-rated bond.

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